Why scams, NPAs abound in PSU banks
The Nirav Modi scam is not the first instance of a public sector bank taken for a ride; neither is it going to be the last. Given the rate at which public sector banks (PSBs) are found entangled in one or the other scam, one might even wonder whether scams are possibly a service the government-controlled banks offer. When it comes to ordinary customers, banks charge individuals at every opportunity. But for privileged customers, neither the rule book exists, nor do cheques and balances work.
Punjab National Bank (PNB) is not the only drain on tax payers’ money; most public sector banks are. PNB is the second largest PSB. It is also said to be the worst bank when it comes to funding questionable business entities and fraudsters. Nirav Modi and his company, Gitanjali Gems, are the latest. Those who have mastered the art of swindling banks seem to be the preferred customers of government-controlled banks. That’s the prevailing perception. Not being held accountable for using tax payers’ money for funding unviable or dubious businesses and dodgy businessmen is nothing new. What’s new is the brazenness with which rules were flouted, despite availability of technology to monitor such practices and failure of audit and regulatory authorities to detect them.
Nirav Modi has blamed PNB for destroying his brand and expressed inability to pay his dues because of brand destruction. But PNB is a bigger loser in terms of credibility, brand good will, customer trust and market capitalisation. The contagious effect of loss of trust and credibility is equally big on other PSU banks and the RBI. Some responsibility must also accrue to the finance ministry for what has happened in PSU banking, which accounts for 70 per cent of India’s banking. Over the last five years, according to RBI, PSU banks reported loan frauds of 61,260 crore. This excludes the Nirav Modi fraud of 11, 400 crore and Rotomac scam worth Rs 3,700 crore. These are reported frauds. There could be many more hidden in the system. Add to these the huge non-performing loans (NPLs) of PSU banks and the size of scams may get bigger and bigger. And all this at a time when we have a government that claims that corruption has been rooted out of the system.
The reality is that corruption and scams are deeply entrenched in India. Historically, it’s been observed that poverty and under-development leads to corruption: poorer the nation, higher the corruption. All developed nations have experienced corruption as part of their growth journey. Along the journey, they put checks and balances to minimise corruption. This is true of Europe and the US in the late 19th and 20th century. Developing economies, including India, are facing the same problem a century later. According to Transparency International’s Global Corruption Perception Index 2017, India is among the ‘worst offenders’, or one of the most corrupt nations, in the Asia Pacific region. Out of 180 countries, India is ranked 81 with its score at 40 on a 100-point scale, where a score below 30 is considered seriously corrupt.
If corruption runs deep in India, in banking space, PSU banks are the worst offenders; cooperative banks are another. It’s not that there is no corruption in private sector banks but the existence of checks and balances makes it difficult to dodge the system. An LoU (letter of undertaking) is a legitimate banking instrument. Problems arise when LoUs are repeatedly issued without any margin money, rules are flouted and technology (CBS) is bypassed for executing large financial transactions. This happened at PNB for years, but more frequently, according to reports, in 2017. So, a huge amount of Rs 11,400 crore slipped through cracks which the bank failed to notice for seven years.
Currently, PSU banks are overburdened with NPAs. According to RBI, total bad loans stood at Rs 8.37 lakh crore at the end of second quarter of 2017-18 fiscal. Of these, bad loans of PSBs stood at Rs 7.34 lakh crore. Bulk of these came from corporate defaulters. On the other hand, NPAs of private sector banks were considerably low at Rs 1.03 lakh crore. NPAs can be divided into two broad categories: genuine (because of business failure) and wilful defaults. According to reports, wilful defaulters owe over Rs 1.1 lakh crore to banks. RBI defines wilful defaults as defaults done despite the borrower’s paying capacity. Technically, many NPLs and defaults may not qualify as scams. But going by the way PSU banks function, there is a possibility of several scams hidden under a cover. It’s also not difficult to presume that a sizable chunk of NPAs could actually be scams and the money may not come back.
The government’s recapitalisation plan worth Rs 2 lakh crore to bailout PSU banks over the next three years is hardly a solution to the problems government-controlled banks are mired in. Without putting a robust system in place to efficiently detect and prevent frauds, there is every possibility that the government’s bailout package may not deliver desired result. So, how should the government deal with incompetent and corruption-ridden PSU banks? There are two divergent views on this.
One view is that band-aid measures will not plug loopholes. It will also not break the politician-bureaucrat-bank nexus. Therefore, management level overhaul, including boards of PSU banks, is a sensible option. An attempt should be made to bring PSU banks on par with private sector banks in terms of efficiency, compliance, pay scales and business targets. In short, the government should either go for privatisation, or at least opt for partial de-nationalisation at operational level. This will make bending rules difficult. The second view is that change of ownership alone will not clean up the mess. For instance, the financial crisis of 2007-08 in the US and the collapse of Lehman Brothers was not the creation of public sector lethargy but of private sector excess and greed. So, it’s not ownership alone that determines banking efficiency, but ethics, compliance, quality of regulation, reporting and management.
In developed world, corruption is said to be largely opportunistic; in India it is systemic and politics thrives on it. So, what’s the way out? The PNB and Rotomac scams have revived the call for comprehensive reforms in banking sector. Finance minister Arun Jaitley has ruled out privatisation of PSU banks. He has also blamed regulators for bank frauds. According to Jaitley, regulators are not accountable in our system. If accountability is an issue, the government should revisit the Bill initiated by the previous government aimed at holding regulators accountable, which had failed to go through parliament. As lack of ethics is also an issue, the government needs to re-look at political funding and make it more transparent.
It’s been observed that poverty and underdevelopment leads to corruption: poorer the nation, higher the corruption. An attempt should be made to bring PSU banks on par with private sector banks in terms of efficiency, compliance, pay scales and business targets.